WHEN IT COMES to buying bonds, quality matters. You want to know the issuer has the wherewithal to keep paying you interest on time for as long as you own your bond—5, 10, 20 or even 30 years from now.

Bond-rating companies assign quality ratings to every new bond when it comes out based on the issuer's financial health and creditworthiness. The rating companies continue to monitor a bond issuer's soundness for the life of its bonds, downgrading them or upgrading them if the issuer's financial position changes.

A bond's rating tells you how creditworthy the issuer is. In other words, the rating tells you how likely you are to get your money back plus the interest promised. Several firms, including Moody's, Standard & Poor's, Duff & Phelps and Fitch, rate bonds by looking at the issuer's financial soundness and its track record of paying off its other debt in the past. The two largest of these companies are Moody's and S&P.

To confuse matters, each company uses slightly different letters or combinations of letters to designate the quality of a bond. The table on page 25 shows you the ratings each company uses and what they mean.

If you're thinking about buying a bond, don't just find out what rating it carries. Call the rating company and ask for a copy of its complete report on the issuer. The report will tell you exactly what kinds of risks the rating company believes the issuer has. The company may already have a fairly large existing debt load compared with its equity. It might be a company that's growing rapidly and seems likely it will want to tap the bond market for additional capital again soon. Or, the company might be in an industry where there have been a lot of takeovers lately, which can hurt bondholders.

Keeping Up With Change

How do you know if your bond's rating changes? Rating companies usually signal the investment community when they are considering a rating change. Moody's announces that a security is "under review", for example. S&P uses its CreditWatch list, Fitch uses its Rating Alert and Duff & Phelps its Rating Watch.

Many public libraries carry these reports. If a rating company is thinking of making a change involving a big company, the press often picks up the news. When the rating of a major company or a city or state is cut, it usually is reported in the financial press.

You can get the current rating on most bonds by calling the ratings information desk at Moody's or S&P's credit division. Both companies are in New York City.

Credit Ratings

These are the different ratings each of the four major bond-rating firms use:

BONUS TIP

There's Always A Bear Lurking In The Woods

YOU INVEST IN stocks because they post gains three years out of every four. You invest cautiously and prepare for turbulence because every few years the bulls move to the sidelines and the bears take over.

The most widely accepted definition of a bear stock market is one in which the key market averages—the Dow Jones industrial average, the S&P 500, the NASDAQ Composite Index—fall by at least 20%. Based on that, we've had 24 bear markets since the dawn of the 20th Century. The worst, which lasted from 1929 to 1933, saw the Dow average fall by 89%. The bear market of 1973-74 saw the Dow fall 45%. The bear market of 1987 lasted only two months, but during that time, the Dow fell by 36%.

Bear markets are awful to live through. Instead of growing, the value of your investments begins to shrink. You aren't moving toward financial success, but away from it. At the worst of a bear market, you may wonder if you'll ever reach the financial goals you set for yourself.

MONEY TIP

You should diversify your bond investments just as you should spread your stock bets. Most experts say owning four or five bonds with different maturities is enough for good diversification. You might own two corporate bonds, two tax-exempts and a Treasury bond. But you can simplify the whole process by owning one or two bond mutual funds.